Business context and reporting period
KVH Industries, Inc. designs and sells mobile satellite connectivity products and services and inertial navigation products. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless noted. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $43.0 | $41.1 | $128.6 | $114.6 |
| Gross profit and margin | $15.2; 35.4% | $15.8; 38.5% | $46.2; 35.9% | $40.5; 35.4% |
| Operating loss | $(3.2) | $(0.5) | $(12.6) | $(11.6) |
| Net income (loss) | $4.0 | $(0.5) | $(5.7) | $(10.3) |
| Operating cash flow | Not separately presented for the quarter | $1.9 | $(2.9) |
- Q3 product sales fell 8% to $15.2 million; service sales rose 13% to $27.7 million. Service was 64.5% of quarterly sales.
- Q3 net income included $7.0 million of other income from full forgiveness of the PPP loan. The company nevertheless reported an operating loss.
- For the nine months, sales grew 12%, but operating loss widened 9%. Research and development expense was $13.4 million and general and administrative expense was $22.5 million, up 15% and 25%, respectively.
- At September 30, cash and cash equivalents were $9.9 million and marketable securities were $17.1 million, totaling approximately $27.0 million. Working capital was $57.5 million. No debt was outstanding; the $6.9 million PPP loan had been forgiven. The $15 million revolver was fully available at quarter-end.
- Capital expenditures were $15.2 million for the nine months, compared with $10.2 million in 2020. Total assets were $170.4 million and stockholders’ equity was $132.0 million at September 30.
Material changes and management commentary
- Q3 mobile connectivity sales increased 10% to $34.4 million, primarily on service growth; segment operating income declined to $1.5 million from $2.3 million. Mini-VSAT subscribers increased 12% year over year, with growth partly attributed to AgilePlans.
- Q3 inertial navigation sales decreased 12% to $8.6 million, and segment operating income fell to $0.3 million from $1.4 million. For the nine months, however, segment sales increased 19%, driven by TACNAV and FOG product orders.
- Q3 operating loss worsened as costs and expenses rose faster than sales. Service costs increased with mini-VSAT airtime costs; product costs also increased as a share of product sales. Management cited higher salaries after pandemic-related reductions were restored.
- Nine-month general and administrative expense included a $3.7 million increase in professional fees, primarily associated with a stockholder’s competing director slate nomination.
- Management expected existing liquidity, operating cash flow and available financing to cover requirements for at least twelve months from the filing date, while warning that weaker-than-expected results could require additional funding.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cautioned that recent revenue growth rates might not continue through the remainder of 2021 or in 2022.
- KVH planned to terminate its legacy satellite network by year-end 2021. At filing, management expected subscribers representing approximately 10% of airtime-services revenue for the first nine months of 2021 would not migrate or might delay migration. The filing also reported that about 21% of maritime airtime subscribers, representing about 25% of that revenue, relied on the legacy network at September 30.
- COVID-19-related travel weakness continued to affect KVH Media Group, with recovery slower than expected; management reported no further impairment indicators at September 30 but warned of possible future impairment if disruption persists or worsens.
- Supply-chain delays and rising raw-material costs affected manufacturing and shipping; management expected cost increases to continue into 2022. The company also cited global chip shortages and sole- or limited-source supplier exposure.
- Defense sales can depend on a small number of large, delay-prone or cancelable orders. The September 30 backlog was $25.4 million, including $8.5 million subject to customer cancellation for convenience; management said backlog is not a meaningful revenue predictor.
- After quarter-end, on October 29, the credit agreement was amended: the $15 million revolver maturity was extended to October 28, 2022, the fixed-charge coverage covenant was removed, and a minimum trailing four-quarter adjusted EBITDA covenant of $3.0 million was added.
- The company reported no legal proceeding it believed likely to materially harm its business or financial condition. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether recurring service growth and subscriber gains can offset legacy-network customer attrition and service-capacity costs.
- Whether margins improve as supply constraints and raw-material inflation persist, and whether capital spending converts into profitable growth.
- How much of reported earnings and cash generation depends on nonrecurring PPP forgiveness and working-capital movements.
- Whether the company can meet the amended revolver’s $3.0 million adjusted EBITDA covenant and maintain adequate liquidity.
- Whether travel recovery, defense-order timing, and the remaining goodwill and intangible asset valuations align with management’s assumptions.